Humpty-Dumpty Deals Are Rare. Which Is Good, Because They Turn M&A into a Shell Game.

Humpty-Dumpty isn’t usually an example anyone would want to follow. Its lesson is that it’s damn hard to reconstitute something that has been broken. The question that hangs over Humpty-Dumpty’s plight is why did he tumble off that wall in the first place? And who should pay the price for his mistake?

In fact, Humpty-Dumpty is a parable for modern mergers and acquisitions in this late-cycle market with low bond yields and lofty share prices. This appears to be a perfect market for companies to attempt what Humpty-Dumpty so famously failed to do: put themselves back together again.

In a Humpty-Dumpty deal—I’m copyrighting the term—a company breaks itself apart, then, after a number of years, decides to get itself back together again through a merger. They’re relatively rare. When companies break up, like
Hewlett-Packard
a few years ago, and
Abbott Laboratories
(ticker: ABT) and
DowDuPont
more recently, the liberated units almost immediately evolve in new directions. They grow apart. The Humpty-Dumpty deal tries to reverse that trend. The origins of many of these deals involve regulatory interventions, which may explain motivations to reassemble Humpty. The current
AT&T
(T) is in part a recreation of the old Ma Bell, broken up by antitrust authorities in 1982. Exxon’s 1999 acquisition of Mobil reconstituted much of the old Standard Oil. Both worked pretty well.

Currently, there are two more problematic Humpty-Dumpty deals on tap, one announced, the other in gestation.
CBS
(CBS) and
Viacom
(VIAB) are merging in an all-stock deal, orchestrated by Shari Redstone’s National Amusements. Her 96-year-old father, Sumner, started it off in 2000, when his company, Viacom, acquired CBS, driven in part by new Federal Communications Commission rules that allowed media companies to own more than one TV station. It didn’t take. Sumner split the company again in 2006, while retaining control of both. Now Shari, after resistance from CBS (undermined by the fall of CBS mastermind Les Moonves after sexual misconduct allegations), is combining the two again.

A similar reconciliation, meanwhile, is in the works at the smoke shop. In 2008,
Altria Group
(MO), the renamed Philip Morris best known for Marlboro cigarettes, split up. Altria retained the heavily regulated U.S. market and the name.
Philip Morris International
(PM), got the rest of the world. Philip Morris has since outpaced Altria, although both have seen cigarette consumption fall, which may be good for humanity but bad for them. So now, despite strategic differences on how to get into the e-cigarette business (Altria has a $12.8 billion stake in Juul Labs) or ride the cannabis wave (Altria has a 45% stake in
Cronos Group
[CRON]), they’re talking about hooking up again.

Shareholders haven’t been pleased by either deal. Viacom and CBS are both down more than 10% since the deal was announced in mid-August, and Altria has slipped almost 5% since news of talks broke last Tuesday, while Philip Morris is off over 13%. But problems with Humpty-Dumpty deals go deeper than just miffed investors.

The rationale for both deals is scale. To compete in media or in nicotine demands jumbo scale. Everybody knows that. Scale is another way of saying consolidation. Analysts generally like scale arguments, until they don’t. More resources mean companies can engage in more M&A, more buybacks, and fatter dividends. Shari Redstone is already talking about ViacomCBS buying its way into the league of megascale media players. And some observers are speculating that she wouldn’t be unhappy to find a buyer for the company. Analysts are whispering about investments a reunited Philip Morris and Altria can make that will free them from the seemingly inevitable decline of the smokes business.

Of course, it’s in the nature of things that M&A settles into cycles: get small, go big; consolidate, restructure; go private, go public, go bankrupt. Wall Street is built on these cycles, and basks in fees at every turn of the wheel. It’s the source of Wall Street’s transactional reputation: encouraging deals in one year that they will be happy to fix, for a fee, in another. While there is truth in the charge, it’s also unfair. Wall Street sells services, and bankers are salesmen. But boards and C-suiters make the actual calls.

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And they also get the largest rewards, which is amazing, given that Humpty-Dumpty deals are, almost by definition, admissions of failure. If a board thinks a company needs to be broken up, then decides it must turn that plan inside out, then someone misjudged the future. It begins to look like a shell game. Few feared cord-cutting or streaming in 2006, but Sumner was eager to maximize CBS’ and Viacom’s market value. And the top folks at Altria were not fretting over tobacco substitutes as much as exploiting a U.S.-overseas regulatory arbitrage in 2008.

Let us offer some necessary caveats. First, the folks who voted to break up often aren’t those who seek reconciliation. Second, M&A exists because the future is uncertain and people are imperfect. M&A is one of a number of tools to cope with that change, but it’s a blunt instrument that’s time consuming, expensive, and risky. Major deals resemble going to war: There are always casualties. Companies are ripped apart. Workers lose jobs, customers get stiffed, shareholder money goes up in smoke. And that doesn’t count outlier risks, like
Bayer
(BAYRY) discovering Monsanto’s Roundup weedkiller was a swamp of class-action suits. (Bayer may well wish it could do a reverse Humpty.)

But a Humpty-Dumpty deal isn’t just about spinning something off and wanting to get it back. It’s about reversing the most fundamental kind of corporate reshaping, short of insolvency. That’s not to say that Viacom and CBS, or Altria and Philip Morris, won’t be successes. It is to say that no one would be surprised to see them fall off that wall again.

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